Figure 2.3 shows that, compared with FDI in Africa, portfolio investment is still small, but of growing importance. At only USD 2 billion, or 13% of FDI in 2000, portfolio investment started to play a significant role in Africa around 2004, with a volume of USD 8 billion, 23% of FDI. Portfolio investment flows to Africa peaked in 2006 at USD 24 billion and took a deep hit during the following years, bottoming at USD ‑22 billion in 2008. Since then an equally steep and impressive recovery has followed: in 2010 portfolio flows to Africa amounted to USD 22 billion, just USD 2 billion shy of the peak of 2006, and equivalent to 30% of FDI.

Figure 2.3: Foreign direct investment and portfolio investment in Africa (billion USD, current)

Source: UNCTAD for FDI; IMF for Portfolio.

http://dx.doi.org/10.1787/888932403458statlink

South Africa is by far the most important destination for portfolio investment in Africa. Over the period 2000‑10, portfolio flows going to South Africa amounted to 128% of all flows to Africa (mainly because Libya had negative portfolio flows of USD 28 billion during this period). In 2010 South Africa received USD 17.5 billion in portfolio flows, 80% of the continent’s total. Another USD 8 billion, or 36% of the total, went to Egypt, whereas Libya had a net outflow of USD 4 billion, or ‑18% of the total African portfolio volume. Libya’s high net outflows reflect the activities of its sovereign wealth fund, which has become a central player in African investment.

The IMF’s Coordinated Portfolio Investment Survey (CPIS) collects information on the stock of cross-border holdings of equities and debt securities from 75 investor countries and territories (IMF 2010b).4 In 2009 the portfolio investment stock of these 75 countries in Africa was USD 150 billion, consisting of 72% equity securities and 28% debt securities. This was also the ratio for the rest of the decade. The United States held a portfolio investment stock of USD 66 billion in Africa in 2009, or 44% of the total investment stock of all countries responding to the survey, followed by Luxembourg with USD 19 billion and Mauritius and the United Kingdom with USD 8 billion each. These figures reflect Mauritius’s critical role as an investment gateway to Africa.

Aside from Mauritius, which is by far the most important source of intra-Africa portfolio investment, the intra-African dynamics of portfolio investment are similar to those of FDI, with South Africa and the northern African countries as the main sources of investment. The only continental respondents to the CPIS, Egypt held 0.2% and South Africa 0.8% of all portfolio stock in Africa.

Box 2.1: A glimpse at African investment policy developments

Global trends in Foreign Direct Investment (FDI) are often tied to developments in investment policy. Certainly, FDI inflows to Africa have increased substantially over the last decades, and so has liberalisation of investment policies – especially in sub-Saharan Africa. Policy reforms are essential to create an enabling environment for boosting domestic as well as foreign investment as a means for African governments to reach their development objectives. 

In recent years, Africa has made more progress than any other region in economic freedom rankings, with countries such as Rwanda joining the ranks of top global reformers (Heritage Foundation Index of Economic Freedom, 2011; World Bank Ease of Doing Business Index, 2011). However, many African countries continue to manifest some regulatory shortcomings, such as in property registration and land titles, in attracting more and better investment.

African governments have undertaken a number of policy initiatives towards investment promotion and further liberalisation of their investment frameworks. These initiatives include:

  • Further Promotion and Facilitation of Investment:
    • The Zambia Development Agency facilitated joint ventures between local and foreign investors by providing a match-making facility and streamlining the business licences process; 
    • Mozambique launched reforms to improve investor protection and strengthen the legislative framework for Public Private Partnerships (PPPs), concessions and megaprojects;
    • Rwanda, Mozambique and Uganda strengthened their legislative environments through launching company laws or improving existing laws aimed at easing business start-up procedures; 
    • Burkina Faso created  the Autorité de Régulation des Marchés Publics, a regulatory body aimed at enhancing transparency of public procurement procedures;
    • Namibia enacted measures authorising foreign banking institutions to open local branches;
    • Burundi removed nominal screening procedures for foreign investors.
  • Tax Policy Reforms:
    • South Africa launched a tax incentive programme for investors in the manufacturing sector;
    • Namibia reduced the corporate tax rate for non-mining companies by 1% (2010 Income Tax Bill);
    • Burundi embarked on tax exemptions for real estate purchases related to new investments and for goods purchased to establish new businesses;
    • Cameroon eliminated the corporate registration tax through the 2010 Revenue Bill.
  • International Investment Rule Making:5
    • Mozambique and Spain signed a bilateral investment treaty (BIT);
    • Mauritius and Australia signed an income tax treaty.
  • Recent Focus on Investment in Agriculture: With 60% of the world’s remaining uncultivated farmland (McKinsey Global Institute, 2010), Africa has started to attract large-scale foreign investments for agricultural production. Recent policies at country level to attract more and better investment in the sector include: 
    • Burkina Faso adopted a rural land management law that ensures equitable access to rural lands and effective management of land disputes to promote agricultural productivity. In addition, the country has streamlined property registration by allowing transfer taxes to be paid at the land registry.
    • Kenya set up an insurance system for pastoralists in the north of the country.

Despite these initiatives, attracting more and better agricultural investment remains a challenge for African policy makers. In this regard, international initiatives – such as Principles for Responsible Agricultural Investment that respect Rights, Livelihoods and Resources by the World Bank, the Food and Agriculture Organisation (FAO), UNCTAD and the International Fund for Agricultural Development (IFAD); or the Voluntary Guidelines on responsible governance of tenure of land and other natural resources by the FAO – can support governments in designing sound policy frameworks for responsible agricultural investment. Other instruments, such as the OECD Policy Framework for Investment in Agriculture (PFIA), can also help African governments enhance policy coherence for agricultural investment. These efforts complement the advances made by the New Partnership for Africa's Development (NEPAD) to boost investment for Africa’s agricultural development through the Comprehensive Africa Agriculture Development Programme (CAADP).

Overall, African countries have continued to strengthen their investment frameworks. This has been one of the factors, alongside improved macroeconomic management, that have contributed to Africa’s resilience to the recent global financial crisis. Moreover, FDI continues to serve as a vital source of growth and development for African people and economies, particularly through spurring employment creation, technology and knowledge transfer, and export diversification. 

Source: Provided by the NEPAD-OECD Africa Investment Initiative.